Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
16th Edition
ISBN: 9780134475585
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
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Textbook Question
Chapter 23, Problem 23.36P
ROI, Rl, DuPont method, investment decisions, balanced scorecard. News Report Group has two major divisions: Print and Internet. Summary financial data (in millions) for 2016 and 2017 are as follows:
The two division managers’ annual bonuses are based on division ROI (defined as operating income divided by total assets). If a division reports an increase in ROI from the previous year, its management is automatically eligible for a bonus; however, the management of a division reporting a decline in ROI has to present an explanation to the News Report Group board and is unlikely to get any bonus. Carol Mays, manager of the Print division, is considering a proposal to invest $2,580 million in a new computerized news reporting and printing system. It is estimated that the new system’s state-of-the-art graphics and ability to quickly incorporate late-breaking news into papers will increase 2018 division operating income by $360 million. News Report Group uses a 10% required rate of
- 1. Use the DuPont method of profitability analysis to explain differences in 2017 ROIs between the two divisions. Use 2017 total assets as the investment base.
- 2. Why might Mays be less than enthusiastic about accepting the investment proposal for the new system despite her belief in the benefits of the new technology?
- 3. John Mendenhall, CEO of News Report Group, is considering a proposal to base division executive compensation on division RI.
- a. Compute the 2017 RI of each division.
- b. Would adoption of an RI measure reduce Mays’s reluctance to adopt the new computerized system investment proposal?
- 4. Mendenhall is concerned that the focus on annual ROI could have an adverse long-run effect on News Report Group’s customers. What other measurements, if any, do you recommend that Mendenhall use? Explain briefly.
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The Height of Fashion Corporation evaluates the performance of the divisions of the company based on ROI and bonuses are based on divisional ROI. A divisional income statement for the Men’s Wear Division for the past year is given below. The company has invested assets of $50,000,000 in the Men’s Wear Division.
Height of Fashion: Men’s Wear Division Income StatementFor the year ended December 31, 2016Sales $25,000,000 Cost of Goods Sold 10,000,000 Gross Profit $15,000,000 Operating Expenses 4,000,000 Income from Operations $11,000,000
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The Custodial Division of Clark's Corporate Services (CCS) has assets of $1.2 million. During the past year, the division had profits of
$228,000. CCS has a cost of capital of 7.5 percent. Ignore taxes.
Required:
a. Compute the divisional ROI for the Custodial Division.
b. Compute the divisional RI for the Custodial Division.
Complete this question by entering your answers in the tabs below.
Required A
Required B
Compute the divisional ROI for the Custodial Division.
Divisional ROI
%
Required A
Required B >
Which of the following statements is true?
Suppose a company evaluates divisional performance using both ROI and residual income. The company's minimum required rate of return for the purposes of residual income calculations is 12%. If a division has a residual income of $6,000, then its ROI is less than 12%.
If a company contains a number of investment centers of differing sizes, return on investment (ROI) should be used rather than residual income to rank the financial performance of the divisions.
ROI and residual income are tools used to evaluate managerial performance in investment centers.
Chapter 23 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
Ch. 23 - Prob. 23.1QCh. 23 - Prob. 23.2QCh. 23 - What factors affecting ROI does the DuPont method...Ch. 23 - RI is not identical to ROI, although both measures...Ch. 23 - Describe EVA.Ch. 23 - Give three definitions of investment used in...Ch. 23 - Distinguish between measuring assets based on...Ch. 23 - Prob. 23.8QCh. 23 - Why is it important to distinguish between the...Ch. 23 - Prob. 23.10Q
Ch. 23 - Managers should be rewarded only on the basis of...Ch. 23 - Explain the role of benchmarking in evaluating...Ch. 23 - Explain the incentive problems that can arise when...Ch. 23 - Prob. 23.14QCh. 23 - Prob. 23.15QCh. 23 - During the current year, a strategic business unit...Ch. 23 - Assuming an increase in price levels over time,...Ch. 23 - If ROI Is used to evaluate a managers performance...Ch. 23 - The Long Haul Trucking Company is developing...Ch. 23 - ABC Inc. desires to maintain a capital structure...Ch. 23 - ROI, comparisons of three companies. (CMA,...Ch. 23 - Prob. 23.22ECh. 23 - ROI and RI. (D. Kleespie, adapted) The Sports...Ch. 23 - ROI and RI with manufacturing costs. Excellent...Ch. 23 - ROI, RI, EVA. Hamilton Corp. is a reinsurance and...Ch. 23 - Goal incongruence and ROI. Comfy Corporation...Ch. 23 - ROI, RI, EVA. Performance Auto Company operates a...Ch. 23 - Capital budgeting, RI. Ryan Alcoa, a new associate...Ch. 23 - Prob. 23.29ECh. 23 - ROI, RI, EVA, and performance evaluation. Cora...Ch. 23 - Prob. 23.31ECh. 23 - Prob. 23.32ECh. 23 - ROI performance measures based on historical cost...Ch. 23 - ROI, measurement alternatives for performance...Ch. 23 - Multinational firms, differing risk, comparison of...Ch. 23 - ROI, Rl, DuPont method, investment decisions,...Ch. 23 - Division managers compensation, levers of control...Ch. 23 - Executive compensation, balanced scorecard. Acme...Ch. 23 - Financial and nonfinancial performance measures,...Ch. 23 - Prob. 23.40PCh. 23 - Prob. 23.41PCh. 23 - RI, EVA, measurement alternatives, goal...
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